In today’s Daily Alert we have a recommendation of a small ($295 million market
cap) medical device company from the analysts at Canaccord Genuity. TearLab
Corp. (TEAR, Nasdaq) makes a unique handheld device that eye doctors use to
test patients for Dry Eye Disease. The device includes a disposable cartridge component,
changed with every patient, giving this story an attractive razor/razor blade angle.
Here’s Canaccord Genuity’s recent analysis.
“We recently conducted 10 interviews of TearLab users to gauge eye specialists’
satisfaction, user habits and decision criteria with the TearLab Osmolarity System. ...
The speed and ease-of-use the TearLab system is high on the list of importance,
along with CLIA waiver and reimbursement. A test must be CLIA waived to find
its way into an eye specialist’s practice. It must also be simple enough for the
technicians to operate with speed and ease, fast enough to not slow down the
flow of patient exams, and reimbursable by insurance companies. Providing
a four-second test ensures there is no disruption to workflow. The veteran
ophthalmologists commented that they see more patients with DES today than
10-15 years ago due to an aging population, environmental conditions, and better
diagnostic tests. ...
Investment Recommendation
“As a result [of the interviews,] we gained comfort with our near-term assumptions
and increased our instrument placements and utilization rates in 2015, resulting in
raising our revenue expectation to $70 million from $65 million. We increased our
cartridge utilization estimate in 2015 from 1,400 tests/instrument to 1,700 tests/
instrument per year and orders booked from 2,500 to 3,000, as we expect all 40
sales territories to be filled in 2014.
“We also raise our price target to $14 from $10 on shares of TEAR, now assuming a
6.5x P/S multiple (up from 5x) to our 2015 sales estimate of $70 million, discounted
at 15% to 2014.
Investment Risks
“Lag time for CLIA waiver certificates for ophthalmologist offices; slow uptake by
physicians; reimbursement risk; sales force expansion; competition; and other
medical technology risks. ...
“We continue to be buyers of TEAR, given its valuable solution for diagnosing dry
eye disease, and a high level of end-user satisfaction.”
Jeffrey Frelick and Mark Massaro, Canaccord Genuity Research,
www.canaccordgenuity.com, 617-371-3711, 5/22/13